FINANCIAL FREEDOM

Ten Reasons Why You Shouldn't Own Dollar Denominated Bonds

By J.S. Kim

Many people think of any type of dollar denominated bonds, whether they are U.S. corporate bonds or U.S. Treasury bonds as a safe place to park your money for reliable sources of income stream. In fact, the U.S. Treasury Department on their own website, even tout U.S. Treasury Securities as a “great way to invest and save for the future.”

Many people believe this nonsense because they are advised of this by a horde of financial consultants that have zero understanding of how the political-corporate-banking triumvirate operates, and how this financial triumvirate has produced a most unattractive likely scenario for dollar-denominated bonds going forward from 2007. Many people think of U.S. Treasury bonds as safe because of the “federal guarantee”. The ten reasons below render that federal guarantee irrelevant.

And don’t think this doesn’t affect you just because you aren’t American. Non-Americans aggregately hold a lot more U.S. dollars in this world than Americans do. If you are one of those misled people, American or non-American, reading the below ten reasons can save you a lot of grief in the future.

(1) The often repeated financial consultant statement that bonds are a “safe place” to park your money, especially if you are older, is a myth. Who cares if you earn a 5% revenue stream from bonds if the currency they are denominated in loses 15% in value over that same time span?

(2) Many of those in the retirement phase of their lives are convinced to invest in longer maturity bonds because of poorer yields of short-term bonds. As the Euro gradually replaces the U.S. dollar as the international currency of choice, the longer maturity necessary to ensure a return of face value on bonds presents a significantly greater risk.

(3) As interest rates go up, the face value of bonds go down. Although Wall Street strongly expects the U.S. Federal Reserve to cut interest rates soon to stimulate a faltering U.S. economy, this is how I see it. At some point and time, the U.S. Federal Reserve will try to block global flight from the U.S. dollar by propping up interest rates, not cutting them.

(4) As the dollar loses value over time, banks and other financial institutions will increase interest rates on loans and other financial instruments to compensate for the heavy losses they are incurring on a weakening dollar. As your costs of doing business and living rise, yields from bonds won’t cut it anymore.

(5) As the massive yen carry trade continues to unwind, and the Bank of Japan takes increasing measures to strengthen the Yen as the Japanese economy continues emerging from its recession, the strengthening of the Japanese Yen in addition to the Pound Sterling and Euro will threaten dollar supremacy.

(6) While most people think that there has been no further attack on the U.S. by terrorists since 9/11, there has been a far more devastating ongoing attack - an ongoing economic war. Though this fact is not discussed at all in the mainstream media, Osama bin Laden’s has repeatedly stated that his number one goal to topple the U.S. as an economic power.

(7) In response to (6), the U.S. Federal Reserve has expanded the dollar money supply to provide funding for the war. With no end in sight to this war, we can expect the dollar money supply to continue to expand, therefore placing more downward pressure on the dollar.

(8) The U.S. has no powerful allies to keep the dollar strong. With protectionism sentiment growing stronger among the newly elected Democratic U.S. Congress, the U.S. certainly has no friends in China, the largest holder of dollar denominated debt at over $1 trillion.

(9) The largest holders of Petrodollar reserves include Russia, Venezuela, Iran and other Middle Eastern countries. Read that list again. There is not a single nation strongly friendly to the U.S. on that list.

(10) When people finally realize that (1) through (9) are true, there may be a flight from the bond market, causing bond prices to tumble.

When you realize the shakiness of your situation as a dollar-denominated bond holder, think about this. Don’t you think foreign governments and wealthy private institutions and individuals, holders of dollar-denominated assets in massively greater quantities, realize the same? When they realize the facts that I’ve laid out above and take actions, their aggregate actions will reflect poorly upon dollar denominated bonds as well.

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